Increasing numbers of pension fund trustees have faith in the company backing their scheme, although trustees are less frequently testing the strength of the same companies' commitments to the scheme – the so-called employer covenant.

The conclusions come from a survey conducted by accountancy and consultancy firm Baker Tilly, which found that 44% of UK pension trustees currently rate the support from their employers to be 'very good' - up from just 21% a year ago.

Curiously, the economic uncertainty seems to have boosted relationships as trustees realise that many companies are short of spare cash to inject into their pension fund.

The report notes that "it seems evident that trustees are adopting a realistic approach to affordability, empathising with their employers' cash constraints." While most of the UK's 6,432 corporate pension funds are sponsored by small firms, larger companies are not subject to a major cash shortage though, and have on the contrary contributed to record UK corporate cash holdings.

Some 70% of trustees surveyed said they feel that sponsoring companies are contributing as much as they can to their pension fund, with 88% saying their scheme is currently in deficit. Of those trustees suffering deficit problems, 34% said their deficit recovery plans were longer than the Pension Regulator's recommended ten year maximum.

Bruce Mackay, head of covenant assessment services at Baker Tilly, said that the survey confirms that pension funds are operating in an extreme environment at the moment. Mackay said "It is tough for employers. The Pensions Regulator summarised it well in his recent 2012 outlook, stating that they face a challenging scenario of increasing life expectancy, shaky economic confidence, uncertain asset returns, low interest rates and artificially low gilt yields."

Mackay added: "This situation has not been helped by the recent rounds of quantitative easing, which have depressed gilt yields yet further."

Taking a back seat

Pension funds' deficit problems are likely to have impacted their budgets, possibly a reason why the Baker Tilly survey finds that monitoring of employer covenants is becoming less frequent.

The survey found that 52% of trustees only review the employer covenant annually, up from 39% twelve months ago.

Many argue that defining the strength of a company's ability to support a scheme with formal covenant monitoring (usually done by external consultants) is an essential practice in troubled economics times. Others challenge the value of monitoring exercises that can cost "tens of thousands of pounds" as one expert told Pension Funds Insider last year.  

The Baker Tilly survey, however, claims that 46% of trustees have used external advisers to monitor their employer covenant and 85% of those found this practise useful.

dbillingham@wilmington.co.uk